The United States and Japan will step up their defence cooperation to deal with the threat from nuclear-armed North Korea as tensions in East Asia remain high, officials from the two allies said on Thursday.

Budget has been deteriorating for 10 years

The underlying position of the federal budget has been in a deteriorating trend since the early 2000s and is only now showing signs of improvement, the Parliamentary Budget Office (PBO) says in a new report.

The PBO's first report on the so-called structural budget balance (SBB) provides estimates from 2001/02 to 2016/17.

The SBB is a measure that looks at the sustainability of the budget and takes into account major temporary or cyclical factors that affect the underlying position of the budget.

It estimates the SBB has declined steadily over the period 2002/03 to 2011/12 and expects the budget will remain in a structural deficit until at least 2016/17.

"At the same time, the government's balance sheet is in a strong position," the independent PBO says in the report.

It says government net debt is low by international standards and forecast to peak at 11.4 per cent in 2014/15.

"This provides a degree of fiscal space for the government to continue to address the underlying structure of the budget and maintain its sustainability," it says.

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From a structural surplus in the range of 1.75 per cent to 3.25 per cent of gross domestic product (GDP) in 2002/03, it moved to balance somewhere in the period of 2006/07 to 2007/08 before falling to a structural deficit of 3.25 to 4.25 per cent of GDP in 2011/12.

"It then showed a sharp improvement in 2012/13 with the structural deficit recovering to around 1.5 to 2.75 per cent of GDP," the PBO says.

"Based on the latest budget estimates further improvement is expected from 2013/14 with the structural deficit in 2016/17 estimated at between 0.25 per cent and 1.5 per cent of GDP."

It says these trends can be explained by the levels of government receipts and payments.

From the peak in the SBB in 2002/03 to its trough in 2011/12 the level of government receipts, excluding the GST, fell by about 5 per cent of GDP.

Over two thirds of this decline was due to the cumulative effect of successive personal income tax cuts between 2003/4 and 2008/09.

Government payments, excluding GST, over the 2002/03 to 2011/12 period rose by about one per cent of GDP, resulting in the structural deficit.

Looking ahead over the period to 2016/17, receipts are expected to increase by about 1.75 per cent of GDP, while payments are expected to decline by about one per cent.